The test applied a hypothetical adverse scenario to the Group’s balance sheet as at 31 December 2015 and compared the theoretical Common Equity Tier 1 (“CET1”) ratio and Tier 1 leverage ratio positions of RBS before and after the impact of strategic management actions, including CRD IV distribution restrictions and conversion of Additional Tier 1 securities (“AT1”).
RBS's low point CET1 ratio under the hypothetical adverse scenario would have been 5.5% which is below RBS’s updated 6.6% Individual Capital Guidance (“ICG”) and below the post-stress CET1 Systemic Reference Point (“SRP”) of 7.1% (please refer to definitions in notes below the table). After the impact of management actions and restriction of the CRD IV distribution, the ratio would have been 5.9%; and subsequently 6.7% post the conversion of AT1 securities. This takes the result above the ICG hurdle rate of 6.6% but it remains below the SRP of 7.1%.
RBS’s Tier 1 leverage ratio under the hypothetical adverse scenario would have been 2.7% which is below the hurdle rate of 3.0% and below the post-stress leverage ratio SRP of 3.2%. After the impact of management actions, the ratio would have been 2.9%, which remains below both the hurdle rate and the Tier 1 leverage ratio SRP.
The bank has taken a number of actions since 31 December 2015 to improve its capital position stress resilience, including the on-going run-down of Capital Resolution (risk-weighted assets (“RWAs”) reduced by £10.4 billion (21%) to £38.6 billion in the first nine months of 2016), the continued reduction in higher risk credit portfolios, the settlement of various litigation cases and regulatory investigations and the issuance of an additional £2 billion equivalent in AT1 securities. A number of these actions impacted our CET1 ratio which was 15.0% as at Q3 2016, compared to 15.5% as at FY 2015. This is above RBS’s CET1 ratio target of 13.0%.
RBS has agreed a revised capital plan with the PRA to improve its stress resilience in light of the various challenges and uncertainties facing both the bank and the wider economy highlighted by the concurrent stress testing process. RBS intends to execute an array of capital management actions to supplement the organic capital generation from its core franchises and further improve its stress resilience, including: further decreasing the cost base of the bank; further reductions in RWAs across the bank; further run-down and sale of other non-core loan portfolios in relation to our personal and commercial franchises; reduction in certain non-core commercial portfolios in Commercial Banking; and the proactive management of undrawn facilities in 2017. RBS expects its revised capital plan to address the shortfall identified in today’s stress test results. However, additional management actions may be required until RBS’s balance sheet is sufficiently resilient to stressed scenarios.
Commenting on the results, Ewen Stevenson, Chief Financial Officer, said:
“We are committed to creating a stronger, simpler and safer bank for our customers and shareholders. We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank's stress resilience including resolving outstanding legacy issues.”
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As part of its Supervisory Review and Evaluation Process (“SREP”) the PRA has reduced the CET1 Pillar 2A component of RBS’s ICG from the previously disclosed 2.8% to 2.1% of RWAs.
ICG is the amount and quality of capital resources which the regulator requires a firm should hold at all times under the overall financial adequacy rules. RBS’s 2016 CET1 ICG comprises 4.5% Pillar 1 requirement and 2.1% Pillar 2A.
Systemic reference point defined as sum of P1, P2A and a 25% per annum phase-in of the current 1% G-SIB buffer.
The projections of RBS’s financial performance under hypothetical stress included in this announcement are based on the methodology and calculations of the BoE. This does not represent RBS’s projections or base capital plan assumptions.
‘Adjusted’ measures of financial performance are before own credit adjustments; gain or loss on redemption of own debt; strategic disposals; restructuring costs and litigation and conduct costs.